Income Tax on Tax Returns (living in, refund, money)

[davecj]

Can someone please explain to me why I have to pay taxes on a tax return? How is this legal?

[North Beach Person]

Are you talking about the MD Income Tax owed on last year's federal tax?

[davecj]

It says I received $xxx amount on 2010s return and have to pay income tax on it.

[North Beach Person]

Welcome to MD. The state considers last year's federal refund as taxable income on this year's MD Income Tax form.

[Richard Martin]

Originally Posted by davecj

Can someone please explain to me why I have to pay taxes on a tax return? How is this legal?

It's not hard to understand.

Let's say that Dave made $20,000 in 2010. Say that the Fed's withheld $2,000. Dave's W-2, which he used to prepare his tax return for Maryland taxes says that Dave's net pay was $18,000. Dave paid his Maryland taxes based on a $18,000 net income. Then Dave did his Fed taxes and got $1,500 back. Dave's real net pay was actually $19,500 but he only paid MD taxes on the stated $18,000 net pay. Maryland would like Dave to pay his taxes based on his real net income of $19,500 so the state just adds the $1,500 extra dollars that Dave received back from the Feds in 2011 to his Maryland net income in 2011 which is when he received his income tax refund.

Does that make sense? That's how it works. You're not paying taxes on taxes. The money you got back from the Fed isn't a tax because they gave it back. If Maryland was requiring you to pay taxes on your Gross Adjusted Income instead of your net income then you would be paying taxes on taxes. That is to say that you would pay taxes on the entire $20,000 gross income instead of the $19,500 adjusted net income.

[janetvj]

You only have to add the Maryland tax refund back to the federal return if you itemized last year. The reason is that you reduced last year's taxable income by the total amount of Maryland tax withheld in 2010. So you didn't pay any tax on it. Then, in 2011, you got part of it refunded. You now have income that you never paid tax on. So on the 2011 tax return, which is when you received the money, you add it back.

If you took the standard deduction on the 2010 return, you don't need to add it back, because you never deducted it in the first place.

And this has nothing to do with living in Maryland. Wherever you live, if you include state taxes in your itemized deductions, you have to then report whatever state refund you subsequently received on the next year's federal return. The state of Maryland taxes that income during the year that you earn it. On the Maryland return, you reduce your itemized deductions by the amount of MD tax withheld.

[EdwardA]

Originally Posted by janetvj

You only have to add the Maryland tax refund back to the federal return if you itemized last year. The reason is that you reduced last year's taxable income by the total amount of Maryland tax withheld in 2010. So you didn't pay any tax on it. Then, in 2011, you got part of it refunded. You now have income that you never paid tax on. So on the 2011 tax return, which is when you received the money, you add it back.

If you took the standard deduction on the 2010 return, you don't need to add it back, because you never deducted it in the first place.

And this has nothing to do with living in Maryland. Wherever you live, if you include state taxes in your itemized deductions, you have to then report whatever state refund you subsequently received on the next year's federal return. The state of Maryland taxes that income during the year that you earn it. On the Maryland return, you reduce your itemized deductions by the amount of MD tax withheld.

This has always confused me. Since I've never itemized I never paid taxes on my federal return but when I did this years MD return on their site and the directions for this line wasn't clear. So I had to google it and I found out as you say. You only pay if you itemize the year before.